The Morning Ledger: CFTC Faces Cash Crunch

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The CFTC is facing a cash crunch. David Meister, who stepped down this week as the agency’s enforcement chief, tells the WSJ’s Jean Eaglesham in this interview that it is so underfunded it has had to delay cases and shelve certain probes. The funding squeeze is forcing the CFTC to make “some very tough choices” about its work, Mr. Meister said. One example: the agency’s decision not to charge two former J.P. Morgan traders over the “London whale” trading mess.

Since Mr. Meister joined the CFTC in January 2011, the agency has reinvented itself. During his watch, it has nearly doubled its enforcement actions and tripled its sanctions, compared with the previous three-year period. But that pace may slow. The agency in the 12 months to Sept. 30 filed 82 enforcement actions, down a fifth compared with the previous year. And “serious budget challenges” are causing delays and other problems, Mr. Meister said.

Regulators often complain about funding pressures and CFTC Chairman Gary Gensler rarely makes a speech that doesn’t include a call for more money, Eaglesham notes. But Mr. Meister says his concerns go deeper than the typical regulatory refrain of “more, please.” His enforcement division is trying to do extra cases with fewer people, he said. It has about 155 officials, 10% fewer than when he started, and roughly the same number as 11 years ago. “That’s a very small staff compared with the size of the job,” Mr. Meister said, comparing the CFTC with the SEC, which has more than 1,200 enforcement officials. “It’s remarkable how small we are.”

THE DAY AHEAD:

Factory activity in the U.S. has been robust despite the government shutdown and fears of a default. The Chicago Purchasing Managers Index for October, released Thursday, surged past expectations, to 65.9. The 10-point jump—economists had predicted a modest decline—is the best reading since April 2011. The survey of manufacturers by the Institute for Supply Management, out today, is seen declining to a still-strong 55. September’s surprising 56.2 was also the highest since April 2011. Another reading that beats expectations, even if it isn’t as robust as the more volatile Chicago number, would leave little doubt about a resurgence in U.S. manufacturing activity, writes Ahead of the Tape’s Spencer Jakab.

Markets flash: Asia ended mixed, with Sony leading Tokyo lower after disappointing earnings, while Hong Kong and Shanghai rose on upbeat economic data. European shares are lower and DJIA futures are up.

CORPORATE NEWS:

Shell CFO: Spending cuts will damage oil industry.Shell CFO Simon Henry warned that cutbacks in oil-company investment to fund higher shareholder payouts will damage investors’ long term interests and encourage boom-bust oil prices, Reuters reports. Mr. Henry said capital expenditure may peak this year and asset sales will need to be stepped up to keep cash flowing in, pointing to $11 billion in dividends and $5 billion in share buybacks as evidence of a commitment to shareholder returns. “Those who are cutting capex are being very highly rewarded… 10-15 years ago the entire industry cut capex, obsessed by returns and with the market egging them on, but cutting investment is one of the reasons we’ve got a $110 oil price,” he said after the company reported a drop in third-quarter earnings.

NSA fallout creates roadblock for AT&T in Europe.AT&T‘s plan to expand in Europe has run into problems because of the outcry across the region over surveillance by the NSA. German and other European officials say any attempt by AT&T to acquire a major wireless operator would face intense scrutiny, given the company’s work with the U.S. agency’s data-collection programs, the WSJ reports. Many bankers, investors and analysts expect AT&T to make a bid for Vodafone as early as the first half of next year. But Europe’s anger over the NSA means a European deal may not happen anytime soon. Peter Schaar, Germany’s federal commissioner for data protection, said AT&T would need to make it clear before closing a deal for a company doing business in Germany that it wouldn’t provide any data to the NSA without adhering to Germany’s privacy laws.

Oracle shareholders give Ellison’s pay a thumbs down. A majority of shareholders opposed Oracle CEO Larry Ellison’s pay in a nonbinding vote following complaints that he makes too much as his company struggles against smaller rivals, Reuters reports. The vote against Oracle’s executive-compensation policy adds to a similar defeat at last year’s meeting, and while it requires no changes from the company, it underscores concern among shareholders about high pay in the face of lackluster financial performance. Mr. Ellison gave up an annual cash bonus of $1.2 million for fiscal 2013, after Oracle missed growth targets, and his annual salary is a token $1. But he took home stock options valued at about $77 million.

SEC warning shakes Avon.Avon shares plunged more than 20% yesterday after it said federal regulators are seeking larger-than-expected penalties to resolve a bribery probe, the WSJ reports. The government’s position, disclosed by Avon in a regulatory filing, adds another big weight on a company already struggling to turn around a string of poor results. Avon didn’t disclose details of what the SEC want, but said it disagreed with the regulator’s calculations and the level of penalties proposed is “not warranted.”

Dole holders accept CEO’s buyout deal.Dole CEO David Murdock eked out a win for his $1.2 billion bid for the food company that he founded, the WSJ reports. The buyout passed with the support of 50.9% of the shares not held by Mr. Murdock, who owns 39.5% of Dole and is taking it private for the second time in a decade. To pass, the deal required approval by a majority of shares not held by Mr. Murdock. Hedge funds have said they would seek appraisal for their shares. Judges in appraisal cases have often awarded more than the offer price, especially in buyouts by large shareholders like Mr. Murdock. An appraisal could result in petitioners’ receiving a lower as well as a higher price, and a decision often can take years.

GOVERNANCE:

MSCI puts ISS on the block. MSCI said in its third-quarter earnings release that it’s exploring strategic alternatives for ISS, its influential proxy adviser and governance-services provider. The move comes as the proxy-advisory business faces regulatory scrutiny, market headwinds and questions about the validity of its analytical models, writes Risk & Compliance Journal’s Gregory J. Millman.

Back in 2012, Nell Minow, co-founder of GMI Ratings and former president of ISS, laid into her former employer at the Wall Street Journal CFO Network meeting, saying the practice of proxy advisers’ providing paid consulting services to companies whose governance they rate is “idiotic.” She even mused about changing the situation by buying ISS. Asked by CFOJ yesterday whether she has any interest now, Ms. Minow replied by email: “It’s unlikely but not out of the question.”

ECONOMY:

Euro zone faces threat of too little inflation. The euro zone’s inflation rate fell to its lowest level in almost four years in October, raising pressure on the ECB to ease the money supply and support the region’s recovery, the WSJ’s Brian Blackstone writes. The drop “has been pretty fast and is unlikely to be reversed,” said Lorenzo Bini Smaghi, a former executive-board member at the ECB. “On top of low inflation you have a euro that is relatively strong and you have a credit crunch,” he said. The low inflation figures offer some support for U.S. criticisms of the export-driven model of Germany’s economy. Earlier this week, the U.S. Treasury said that “anemic” growth in German domestic demand, and its dependence on exports, had led to a “deflationary bias for the euro area as well as for the world economy.” Germany called Washington’s criticism of its economic policies “incomprehensible.” But a separate German government report yesterday showed retail sales unexpectedly fell in September, underscoring the weakness in consumer spending.

China manufacturing strengthens. Data from China, Taiwan and South Korea released today showed a broad recovery in manufacturing activity, the WSJ reports. China’s official manufacturing Purchasing Managers Index rose to an 18-month high in October—51.4 , up from 51.1 in September. A private index from HSBC and Markit Economics came in at 50.9, up from 50.2 the previous month. A reading above 50 indicates activity is expanding. However, given the U.S. recovery and the emergence of many European countries from recession, many economists would expect these Asian export powerhouses to be performing more strongly. “The export performance of Asia seems to be lagging the global industrial cycle, which is highly unusual,” said Frederic Neumann, co-head of Asian economic research at HSBC. “There’s mild improvement, but it’s still puzzling that we haven’t seen stronger numbers.”

CFO MOVES:

AstraZeneca, a British pharmaceutical company, promoted Marc Dunoyer as chief financial officer and an executive director of the board. He succeeds Simon Lowth, who left the company Thursday. Mr. Dunoyer joined AstraZeneca in June from GlaxoSmithKline as executive vice president, global portfolio and product strategy. His base salary, to be paid in pounds, is equivalent to about $1.1 million at current exchange rates, and his target bonus will be 90% of his base salary but could be up to 150%. His target long-term incentive award will be 200% of his base salary. The announcement was combined with news that the company had received a civil investigative demand from the U.S. Justice Department in October seeking documents and information about a clinical trial involving Brilinta, a cardiovascular drug. Separately, the company said it received a subpoena in September from the U.S. attorney’s office in Boston seeking documents and information regarding two versions of the company’s schizophrenia treatment.

Moly Mines, a Toronto-based mining company that trades on the Toronto and Australian stock exchanges, named David Pass as acting chief executive officer, and Alan Howells acting chief financial officer. Mr. Pass was previously the general manager of operations. Mr. Howells was previously financial controller. In accordance with rules of the Australian Stock Exchange, Moly Mines was required to disclose the compensation of Mr. Pass only: he will earn a base salary of $435,000 (plus a superannuation guarantee of 10%) and a retention bonus of 20% of the base salary payable after one year of service.

THE WEEKEND READER

Every Friday we select a handful of in-depth articles we think are worth a bit of your valuable weekend time, either because they peel back the layers on a compelling business story, or somehow make us look at business in a different light.

What board directors really do in their free time. No surprise, but board members like to golf—at least male board members living in North America do. Travel is another popular pursuit, especially for female board members in Asia, North America or Europe. The Harvard Business Review’s Boris Groysberg and Deborah Bell surveyed corporate directors world-wide on their personal pursuits, partly to understand the role interests play in group dynamics. “Throughout our research on boards, directors have repeatedly emphasized that being in sync with their fellow board members is a key to establishing good board dynamics,” they write. They find differences in interests not only across global regions but between the sexes. “Another observation that especially intrigued us: the percentage of directors in each region who named ‘family and friends’ as an outside interest,” they write. “This finding made us wonder if the work-life balance had become so complicated for many that spending time with family and friends had come to be regarded as an interest.”

How the iPod president crashed. Part of the aura surrounding Barack Obama’s successful 2008 campaign concerned his faith in how technology would guide D.C. into the digital age. Presidential advisers talked about “their boss’s belief that it was time for an ‘iPod government,’” Ezra Klein writes in Businessweek. But HealthCare.gov proves that the administration got iPods confused with Microsoft Zunes. “The iPod was a disruptive innovation. It destroyed a lot of companies,” Klein writes. Creating an iPod government would need to be equally disruptive, “overhauling the federal procurement system” and “ripping through the IT departments of agency after agency.” Government technology programs that have worked—such as the U.K.’s gov.uk—have done so because the responsible organizations were able to create a culture that attracted top technologists, not the “entrenched vendors who haven’t really had to compete in the world of technology,”as one White House insider explains.

Google’s original X-Man. Artificial intelligence and robotics expert Sebastian Thrun tells Foreign Affairs that as far as innovation is concerned, the best is yet to come. “I believe we live in an age where most interesting inventions have not been made, where there are enormous opportunities to move society forward,” he says. Mr. Thrun has every right to such an opinion, given his self-described role trying to “massively change society for the better.” He led the team that won the 2005 Darpa driverless-car challenge, became the first head of Google’s secretive research lab, Google X, guiding its Google Glass efforts, and founded online education start-up Udacity. “I believe online education can make a difference in the world, more so than almost anything else I’ve done in my life” he says. At 18, he lost his best friend to a traffic accident, an event that made his later efforts in driverless cars more personal. “I carry this with me every day. I feel that any single life saved in traffic is worth my work,” he says.

Real estate industry veteran Diane Morefield, EVP and CFO of Strategic Hotels & Resorts, Inc., discusses the challenges she has undertaken throughout her career in both finance and operational roles and her management style. While viewing herself as a “conservative voice” in an industry known for risk-taking, she says it's important to take risks when it comes to building one's career.